For example… A client’s company runs a garage and car showroom from a property it bought five years ago for £300,000 + VAT. We had checked at the time that the seller had opted to tax so we were satisfied that it was correct to be charged VAT, and the client recovered the input tax. The director has been reviewing his pension arrangements and would like to transfer the property into his SIPP. What are the VAT implications if he does this?
When the building was bought by the company there was an option to tax in place, made by the seller. A point that is often misunderstood is that an option to tax does not transfer across with the property and therefore, in the client’s hands, supplies of the property would be exempt. However, if the company were to sell the property to the SIPP exempt this would lead to an unwelcome outcome.
As the company occupied the building to make taxable supplies as a garage and car dealer it was entitled to recover the VAT of £60,000 on the purchase; there was no need to make an option to tax at this stage. However, unknowingly, it has a VAT issue known as the Capital Goods Scheme (CGS) to consider, meaning that the use of the property has to be monitored for ten years, and adjustments made if the balance between taxable and exempt use alters.
The CGS applies to capital expenditure on an interest in land or buildings with a value of £250,000 or more (exclusive of VAT) which was subject to VAT at the standard or reduced rate. It also applies to alterations, extensions and annexes to buildings, and to capital expenditure on services, and goods affixed to the building in the course of refurbishing or fitting out a building. Detailed guidance on the CGS can be found in Notice 706/2.
Adjustments under the CGS would be triggered if the sale to the pension fund were now an exempt supply; meaning, for your client, a potential repayment of 40-50% of the VAT already recovered (because the remaining complete years of the ten year term would all be considered to be for exempt use).
The solution is for the client’s company to make its own option to tax on the property by completing a VAT1614A to notify HMRC before selling to the SIPP in order to make the property a taxable supply. This means that VAT will be charged on the sale, as well as ensuring there is no liability to repay any input tax.
If the SIPP intends to let the property back to the company for a commercial rent it should ensure that it too is VAT registered with its own option to tax in place prior to its purchase as there is another common pitfall to avoid. There is no pre-registration input tax recovery on a CGS item, meaning that if it were to be incurred prior to the SIPP registering it would need to be claimed by the SIPP over the ten years of the CGS.
Just on a topical note, the Office of Tax Simplification in its recent report suggested that the threshold for the CGS could be increased, as it has been set at its current level since the inception of the scheme in 1990 and property values have risen significantly since then bringing far more into the CGS scope. Whether HMRC act on this remains to be seen.